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Abstract: The events of September 11, 2001 had profound financial consequences for the insurance industry. Property and liability insurers took significant underwriting losses in many lines as a result of this event. Property and liability insurer stocks might then be expected to have higher negative abnormal returns than the stocks of life and health insurers. Using traditional event study methodology with a longer event window, we find that property and liability insurer stocks did generate much larger abnormal returns than those of life and health insurers. We also find that, after the first week of trading subsequent to the market's reopening on September 17, the abnormal returns were not significant from zero, which is consistent with the efficient market hypothesis. Insurance industry stocks recovered quickly after the events of September 11 and sometimes even outperformed the market. Investors were rational and responded to the expectation of increases in insurance demand and strength in capacity constraints.
INTRODUCTION
The events of September 11, 2001 have had repercussions across time and around the world. Because commercial airliners were used as weapons, the airline industry and then the insurance industry expected long-term negative effects. The extensive loss of lives, the massive property damage, and the resulting business interruptions were unprecedented in the U.S. economy. Financial markets also were in short-term disarray. The stock market was closed for a week, not reopening until September 17. The Dow Jones Industrial Average (DJIA) dropped about 7% by the end of that day compared to its previous close on September 10. In the following two days, the DJIA dropped another 1.8%, reaching its lowest level since December 1998. Among all the industries represented in the stock markets, commercial airlines suffered most. As property and liability insurance coverage was prevalent within the airline industry, the property and liability insurance industry stood to bear most of the airlines' catastrophic losses. Reinsurance companies ultimately paid most of those losses. The reinsurers would later pass those large losses back to primary insurers in premium increases. The near-term estimated losses for insurers were expected to cause investors to adjust their investment behaviors as they factored in all available information. These estimates were later updated several times, but at this writing final loss numbers remain unclear, mainly...